Which Debt Should We Pay Off First?: Money Expert Jean Chatzky Responds

One CafeMom is trying to determine which debt to pay off first. Here's what Jean had to say.

Q:

Jean,

What should be our priority to pay off? A student loan or a car loan?

My husband wants to make double payments on one, which I applaud; we already make double payments on our credit card so we can get out of debt. The problem is that he wants to make them on the student loan instead of the car. I disagree and say the car loan should be paid first because not only is the APR higher, but it's for a higher amount, and we are not planning on replacing the car any time soon.

I’m with you. The cheapest, fastest road out of debt always goes directly through the highest interest rate. What that means, though, is that if the interest rate on your credit cards is higher than both the car loan and the student loan you should put all of your extra muscle toward wiping out that debt first — even if it means tripling or quadrupling the payments.

If you’re getting close to wiping the credit card debt clean and are indeed choosing between the car and student debt, here’s one more reason to put the car loan first. The interest on that student loan debt may be tax-deductible, rendering it cheaper still.

Here are the current IRS rules regarding student loans. You can claim the student loan interest deduction if all of the following apply:

You paid interest on a qualified student loan in tax year 2008

Your filing status is not married filing separately

Your modified adjusted gross income is less than $70,000 ($145,000 if filing jointly)

You and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return